Health Care Plan Debate Heats Up, But Whose Costs More?

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Health care has returned as a central issue in the final weeks of the presidential campaign. One reason may be a recent Kaiser Foundation poll, which found health care is now the second most important issue behind the economy for undecided voters. Another: the candidates are using health care to spotlight their accusations on tax policy.

The Obama campaign has attacked Senator John McCain’s health care plan in advertisements and on the campaign stump as a tax hike on the millions of Americans who now receive health benefits through their employers.

"For the first time in history, you will be taxing people's health care benefits," Senator Barack Obama charged during the final debate."

Senator McCain’s rebuttal: 95 percent of Americans will save money under his plan because the tax increase on benefits would be offset by the refundable health care tax credit that is at the heart of his plan. "They will receive not only their present benefit," he argues, but the tax credit will put many families ahead when "you add $5,000 onto that."

Who’s Right?

"Politics and complex policy are a dangerous mix," writes Galen Institute President Grace-Marie Turner in a recent e-mail. Turner, a health care consultant who has advised the McCain campaign, calculates that the republican presidential nominee’s $5,000 refundable tax credit families would offset the tax on the typical $12,000 employer benefit plan.

But, when you factor in out-of-pocket expenses — typically 20 percent of the value of the plan — Ron Fontanetta a Principal with benefit consultants Towers Perrin says those in higher tax brackets would see their costs rise under the McCain plan.

Tax Credit Math

Let’s use Joe the Plumber as an example of someone in the 15 percent income tax bracket and receives a $12,000 employer plan. Under the McCain plan, Joe would be taxed $1800 for his benefits (25 percent of $12,000). He’d typically have to pick up about $2400 in out-of-pocket costs (20 percent of 12,000). McCain's $5,000 refundable tax credit would leave Joe $800 ahead.

The math works out against Joe if he earns more, as you’ll see in the table below:

McCain argues, however, that his plan would provide an incentive to reduce those out-out-of pocket costs and shop for a less expensive plan. Allowing individuals to buy across state lines would facilitate this.

McCain charges Obama’s plan would effectively create a national medical entitlement program with very rich benefits, which would result in overall higher taxes.

The Big Tax Picture: Over $1 Trillion

Tax Policy Center has calculated that the refundable tax credit and John McCain's overall health plan will increase the deficit by $1.3 trillion over the next ten years, while Barack Obama's plan providing subsidized access through an insurance exchange will boost the deficit by roughly $1.6 trillion in the next decade.

McCain’s plan, analysts say would cost less over time, because the tax credit would likely be indexed to inflation, while medical costs are likely to grow more quickly.

Both plans amount to ambitious fiscal policies at time when the next president will face massive economic challenges, which make many skeptical about the viability of both proposals.

“You’re not going to solve the health care dilemma by shifting tax credits or offering everyone the same plan as the U.S. House and Senate, “says Bruce Josten, executive vice president for governmental affairs at the U.S. Chamber of Commerce. Josten says the most important thing the next president should focus on is reigning in health care costs.

The Plan Cost Equation

The candidates say their cost-saving measures will help pay for their plans. Both McCain and Obama claim say they'll promote measures that include broader adoption of health information technology and electronic health records, greater emphasis on preventive care and implementation of best practices to bring down costs to the overall health system. Both pledge to cut costs from Medicare.

“Both of them are pretending that the health care savings that they're talking about will offset a lot of costs,” Says Maya McGuiness, president of The Committee for Responsible Federal Budget. “They've likely exaggerated the health care saving they'll realized."

McCain's plan puts the combined savings at about $85 Billion, while Obama puts the savings at just over $90 billion, according to calculations from the Committee for a Responsible Federal Budget.

But even with those calculations, the Committee puts the budget impact of McCain's policies would start off at a $17 billion deficit in the first year, while the Obama plan would start off $65 billion in the red.

Here’s how the Committee itemizes costs for both plans:

And yet, there’s one big health care issue notably not on the list on either plan, says Maya McGuiness: the ballooning Medicare deficit.